Answered: What is the effective after-tax…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter22: Providing And Obtaining Credit

Section: Chapter Questions

Problem 4P: Gifts Galore Inc. borrowed 1.5 million from National City Bank. The loan was made at a simple annual...

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Suppose you have a credit card with a 14% interest rate with monthly compounding, a home equity loan with a 7% interest rate with monthly compounding, and a bank savings account paying a 5% interest rate with annual compounding (all interest rates are quoted as Annual Percentage Rates). Your income tax rate is 40%. Only the interest on the savings account is taxable, and only the interest on the home equity loan is tax-deductible.

What is the effective after-tax interest rate of each instrument, expressed as an annual rate?

Suppose you are considering purchasing a new car and are offered a car loan with a 4.8% interest rate (Annual Percentage Rate) and monthly compounding (which is not tax-deductible).

Should you take the car loan?

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